There are a number of different kinds of risk, and they can impact your portfolio in different ways. Whether you are invested in the stock market, bond market, bank accounts, or annuities; these risks will be present. By including the right types of risk in your portfolio, and by managing them appropriately you can actually increase the expected rate of return while holding the volatility relatively constant. But, including other kinds of risk can actually sabotage and destroy your portfolio. So, it’s a double-edged sword. You need to know which types of risk that can impact your portfolio, and how to manage them to your benefit.
The first risk in this discussion is Specific Business Risk, this is the risk of having a sizable portion of your portfolio in a single company. This may be an obvious no-no when investing, but many people have a large portion of their portfolio in their own company’s 401k. When you work for a company for a while you may think you have a handle of what may be going on in the company. Unfortunately we have to deal with the real world and real stories like Enron, WorldCom, and even more recently Lehman Brothers.
Specific business risk doesn’t necessarily mean that the company WILL go under; the problem comes when an unknown or unforeseeable event happens in the company. Take another company as an example, BP Amoco. Who would have ever guessed that there would be such a major oil spill that happened on that day by that company? It was specific to that company right? It didn’t affect Chevron, Exxon, or any other company in that industry, right?
This is one of the reasons why we talk about diversification. If you held just one company, and it goes bankrupt then you lost all your money. If you held 100 companies and one goes bankrupt, then you only lost 1% of your portfolio. Imagine if you held a portfolio with over 12,000 different holding in it! That is what you have if you are with Pathfinder. If this is a concern for you, please contact us. We can send you an Investor Awareness Guide to help with some of the major problems that investors deal with. Go to the top of the page under “About Us” to contact us.
Philip A. Guske